When Fannie Mae was bleeding cash back in 2008, the government took it into conservatorship, which allowed Fannie Mae to draw funds from the Treasury to stay afloat. In return, the government took senior preferred shares of the company. Fannie Mae now has to pay nearly all of its profits, save a small capital cushion, to the government in dividends. This doesn't pay back the draw; it is just a dividend.
The difference this quarter is that the dividend is huge. Thanks to the company's new profitability, Fannie Mae is able to take a tax credit from years ago worth over $50 billion, according to its earnings release:
As a result of actions to strengthen its financial performance and continued improvement in the housing market, Fannie Mae's financial results have improved significantly over the past five quarters. Based on analysis of all relevant factors, Fannie Mae determined that the release of the valuation allowance on its deferred tax assets was appropriate.
Therefore, Fannie Mae will pay the Treasury $59 billion by the end of this quarter, bringing its total tally of dividend payments to $95 billion—close to the $117 billion it originally drew. Again, the money does not go to pay back that draw. So where does it go?
(Read More: Fannie Mae Should Be Abolished, Says Barney Frank)
"It's up to the Treasury to decide what to do with it," said Fannie Mae CEO Timothy Mayopoulos in a conference call with reporters.
With Fannie Mae and its smaller cohort, Freddie Mac, turning so much profit, the push to dismantle them becomes far more complicated. Unlike several years ago, they are now making the government money at the same time that the feds should be winding them down.
"There is a risk that policy makers will look at our profitability and conclude that they don't need to take action to reform the housing finance system," said Mayopoulos. "That would be a mistake."
As of now, Fannie Mae, Freddie Mac and the Federal Housing Agency—all government sponsored entities (GSEs)—provide the bulk of the nation's housing finance. The private market has yet to dive back in with both feet. Fannie and Freddie are still crucial to the housing recovery, but should the government reap all the rewards rather than mortgage holders or investors?
"It seems strange that everyone else who borrowed from U.S. Treasury in the crisis is allowed to pay back, but the GSEs are neither allowed to rebuild capital nor repay. Shouldn't we get to reform rather than use them as a budget tool?" asks Joshua Rosner, an analyst at Graham Fisher.
Lawmakers are busy debating how to create a private housing finance system with at least a modest government back-stop. Simultaneously, Washington is fighting a wider budget battle, owing to an enormous federal deficit. The two are now intimately connected, and Fannie's new profitability is the link.
"If Fannie and Freddie this year effectively 'pay back' all the bailout money they received since late 2008, I think we need to think long and hard about the need to continue collecting money from the firms. Is it punishment for past sins? Or is it because the government needs cash cows?" asks Guy Cecala of Inside Mortgage Finance.
"And while it may sound like crazy talk, we probably also need to at least discuss whether Fannie and Freddie should be taken out of conservatorship once they pay back the money Treasury advanced them and they are in fact solvent," he added. "Unfortunately, the current Treasury agreement treats them as wards of the state regardless of how much money they return to the government or how much money they earn."
The housing crash was a game-changer for housing finance in the United States. That said, the recovery of both the overall housing market and the companies that fund it will necessitate new thinking as well.
—By CNBC's Diana Olick; Follow her on Twitter
@Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC
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